There will be no rate cut today from the Reserve Bank. The central bank wants to sit and wait a while longer to see how the non-mining segment of the economy responds to the succession of rate cuts since late 2011. In fact, if the Reserve Bank cuts its key cash rate from now on, you will know something terrible has happened offshore or something has gone bad very quickly in the local economy. As there are no signs of either happening, the bank will take another month off.
The post-meeting statement from governor Glenn Stevens will probably place less emphasis on the easing bias from previous statements and board minutes. That’s despite the continued worries about the bailout of Cyprus, which are still rattling the eurozone. But offsetting that, the Chinese economy is still doing better, Japan is seeing a glimmer of a pick-up in business sentiment and the US economy is gathering strength, not withstanding a fall in the latest measure of manufacturing activity. But on the downside, South Korea (one of our major export markets) remains weak and will introduce an emergency budget as it battles a high currency and slowing exports, the eurozone remains a recessed black hole with no real sign of any improvement appearing quickly and India is still struggling to find the growth genie that escaped a year or more ago.
For the Gillard government, the lack of a rate cut should be good news. Over Easter the Fitch Ratings group reaffirmed the country’s AAA rating, and with the economy performing around trend and inflation low, no shocks are likely to emerge in coming months. But judging by the way debate is growing around possible changes to superannuation, the government is once again showing its unerring ability to undermine the good news story it has to sell to the electorate.
The bank could cut in reaction to a crumbling euro or if the housing industry fails to rebound. That’s why the long campaign for the September 14 federal poll is a danger to the economy, as is a smoke-and-mirrors federal budget on May 14 from the government that fails to address the fiscal strains on the revenue side.
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The key policy question for the RBA remains: what happens to the rest of the economy as mining investment slows? Will non-resource business investment pick up, and will the housing sector start expanding again? Despite that conundrum, the Aussie dollar remains strong, and continues to trade above $US1.04 after showing signs of easing towards parity with the greenback before the Cyprus crisis erupted.
That strength is one of the reasons why interest rates have been cut by 1.75 percentage points since November, 2011. The full effects of the cut will take time, hence the central bank’s “wait and see” approach, as outlined by Stevens in last month’s post meeting statement on March 5:
“The board’s view is that with inflation likely to be consistent with the target, and with growth likely to be a little below trend over the coming year, an accommodative stance of monetary policy is appropriate. The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand.”
And in a speech on March 19 in Sydney, RBA deputy governor Phil Lowe laid out the central bank’s satisfaction with how the economy is travelling:
“At the moment though, the available evidence does suggest that lower interest rates are doing their work broadly as expected.”
Nothing since then has happened to change that view, in fact, if anything, there has been a clear improvement in the local economy with consumer confidence rising, car sales remaining strong, retail sales kicking higher and the jobs market continuing to grind on creating employment and not rising, as many forecasters have been saying for the past year. This week we get further updates with new home sales for March, and February’s the trade balance, building approvals and retail sales figures.